2008 - · pdf fileinterim report 2008 3 condensed consolidated balance sheet 30 june 2008 as...

Interim Report2008

1

The board (the “Board”) of directors (the “Directors”) of First Tractor Company Limited

(the “Company”) is pleased to announce the unaudited condensed consolidated interim

results of the Company and its subsidiaries (collectively, the “Group”) for the six months

ended 30 June 2008 (the “Reporting Period”) with the comparative figures for the

corresponding period in 2007. The condensed consolidated interim financial statements

are unaudited, but have been reviewed by the audit committee (the “Audit Committee”)

of the Company.

The Board does not recommend the payment of any interim dividend for the six months

ended 30 June 2008.

Interim Report2008

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CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED INCOME STATEMENTFor the six months ended 30 June 2008

For the six months

ended 30 June

2008 2007

Unaudited Unaudited

Notes RMB’000 RMB’000

REVENUE 3 4,040,685 3,595,702

Cost of sales (3,532,576) (3,141,865)

Gross profit 508,109 453,837

Other income and gains 3 71,064 128,608

Selling and distribution costs (148,020) (116,895)

Administrative expenses (223,517) (239,395)

Other expenses (57,764) (27,324)

Finance costs 4 (21,568) (14,979)

Share of profits and

losses of associates (2,111) (3,150)

PROFIT BEFORE TAX 5 126,193 180,702

Tax 6 (38,908) (50,819)

PROFIT FOR THE PERIOD 87,285 129,883

Attributable to:

Equity holders of the parent 77,943 119,730

Minority interests 9,342 10,153

87,285 129,883

EARNINGS PER SHARE ATTRIBUTABLE

TO ORDINARY EQUITY HOLDERS

OF THE PARENT 8

Basic RMB9.21 cents RMB15.25 cents

Interim Report2008

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CONDENSED CONSOLIDATED BALANCE SHEET30 June 2008

As at As at

30 June 31 December

2008 2007

Unaudited Audited


NON-CURRENT ASSETS

Property, plant and equipment 9 1,235,440 1,256,455

Prepaid land premiums 10 30,416 30,374

Goodwill 52,990 52,990

Interests in associates 18,489 19,800

Available-for-sale investments 131,669 187,150

Loans receivable 11 214,949 83,554

Deferred tax assets 38,001 28,331

Total non-current assets 1,721,954 1,658,654

CURRENT ASSETS

Inventories 886,813 841,800

Trade and bills receivables 12 1,443,520 925,946

Loans receivable 11 168,913 194,215

Bills discounted receivable 13 127,003 56,053

Prepayments, deposits and

other receivables 14 623,693 465,326

Equity investments at

fair value through profit or loss 28,596 47,365

Pledged deposits 15 263,254 151,640

Cash and cash equivalents 15 881,190 1,147,084

Total current assets 4,422,982 3,829,429

Interim Report2008

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CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)30 June 2008

As at As at30 June 31 December

2008 2007Unaudited Audited


CURRENT LIABILITIESTrade and bills payables 16 1,646,089 1,144,065Other payables and accruals 17 597,857 575,971Customer deposits 18 128,489 131,231Due to banks and

other financial institutions 20,000 —Interest-bearing bank borrowings 496,000 459,900Tax payable 47,961 20,824Provisions 40,247 34,153

Total current liabilities 2,976,643 2,366,144

NET CURRENT ASSETS 1,446,339 1,463,285

TOTAL ASSETS LESSCURRENT LIABILITIES 3,168,293 3,121,939

NON-CURRENT LIABILITIESInterest-bearing bank borrowings 250,000 214,000Deferred income 108,944 105,154Deferred tax liabilities 13,709 25,225Provisions 21,329 24,667

Total non-current liabilities 393,982 369,046

Net assets 2,774,311 2,752,893

EQUITYEquity attributable to

equity holders of the parentIssued capital 845,900 845,900Reserves 1,744,923 1,703,768Proposed final dividend — 25,377

2,590,823 2,575,045

Minority interests 183,488 177,848

Total equity 2,774,311 2,752,893

Interim Report2008

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CONDENSED CONSOLIDATED STATEMENT OF CHANGES INEQUITYFor the six months ended 30 June 2008

Attributable to equity holders of the parent

Available-

General for -sale Retained

Issued Share Statutory General Enterprise and investments Exchang e profit/

share premium surplus surplus Reserve expansion statutory revaluation fluctuation (Accumulated Minority Total

capital account reserve reserve fund fund reserve reserve reserve losses) Total interests equity

Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited

RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000

At 1 January 2008 845,900 1,539,938 99,695 64,744 3,373 2,356 4,841 74,932 (8,772 ) (51,962 ) 2,575,045 177,848 2,752,893

Changes in fair value of

available-for-sale inv estments — — — — — — — (23,583) — — (23,583) — (23,583 )

Disposal of available-for-sale investments — — — — — — — (10,221) — — (10,221) — (10,221 )

Exchange realignment — — — — — — — — (2,984 ) — (2,984 ) — (2,984 )

Total income and expense

recognised directly in equity — — — — — — — (33,804) (2,984 ) — (36,788) — (36,788 )

Net profit for the per iod — — — — — — — — — 77,943 77,943 9,342 87,285

Total income and expense for the period — — — — — — — (33,804) (2,984 ) 77,943 41,155 9,342 50,497

Final 2007 dividend declared — — — — — — — — — (25,377 ) (25,377) — (25,377 )

Dividends paid to minority shareholders — — — — — — — — — — — (3,702 ) (3,702 )

Transfer from/(to) reserves — — — — 217 217 — — — (434 ) — — —

At 30 June 2008 845,900 1,539,938 99,695 64,744 3,590 2,573 4,841 41,128 (11,756 ) 170 2,590,823 183,488 2,774,311

At 1 January 2007 785,000 1,378,840 77,570 64,744 2,873 2,356 4,446 97,150 (4,244 ) (210,704 ) 2,198,031 170,018 2,368,049

Changes in fair value of

available-for-sale inv estment — — — — — — — 13,643 — — 13,643 — 13,643

Disposal of available-for-sale investment — — — — — — — (62,873) — — (62,873) — (62,873 )

Exchange realignment — — — — — — — — (1,722 ) — (1,722 ) — (1,722 )

Total income and expense

recognised directly in equity — — — — — — — (49,230) (1,722 ) — (50,952) — (50,952 )

Net profit for the per iod — — — — — — — — — 119,730 119,730 10,153 129,883

Total income and expense for the period — — — — — — — (49,230) (1,722 ) 119,730 68,778 10,153 78,931

Disposal of a subsidiary — — — — — — — — — — — (150 ) (150 )

Dividends paid to minority shareholders — — — — — — — — — — — (2,671 ) (2,671 )

Transfer from/(to) reserves — — 334 — 500 — — — — (834 ) — — —

At 30 June 2007 785,000 1,378,840 77,904 64,744 3,373 2,356 4,446 47,920 (5,966 ) (91,808 ) 2,266,809 177,350 2,444,159

Interim Report2008

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CONDENSED CONSOLIDATED CASH FLOW STATEMENTFor the six months ended 30 June 2008

For the six months

ended 30 June

2008 2007

Unaudited Unaudited

RMB’000 RMB’000

NET CASH OUTFLOW FROM

OPERATING ACTIVITIES (181,646) (1,622)

NET CASH OUTFLOW FROM

INVESTING ACTIVITIES (152,016) (136,228)

NET CASH INFLOW FROM

FINANCING ACTIVITIES 68,397 45,830

NET DECREASE IN CASH AND

CASH EQUIVALENTS (265,265) (92,020)

Cash and cash equivalents

at beginning of period 1,049,905 708,030

Effect of foreign exchange rates, net (2,984) (1,722)

CASH AND CASH EQUIVALENTS

AT END OF PERIOD 781,656 614,288

ANALYSIS OF BALANCES OF CASH

AND CASH EQUIVALENTS

Cash and bank balances 769,637 600,214

Non-pledged time deposits with

original maturity of less than

three months when acquired 12,019 14,074

781,656 614,288

Interim Report2008

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIALSTATEMENTS30 June 2008

1. BASIS OF PREPARATION AND ACCOUNTING POLICIES

The unaudited condensed consolidated interim financial statements are prepared

in accordance with Hong Kong Accounting Standard (“HKAS”) 34 “Interim Financial

Reporting”. They have been prepared under the historical cost convention, except

for certain equity investments, which have been measured at fair value. The

accounting policies and basis of preparation adopted in the preparation of the

interim financial statements are the same as those used in the annual financial

statements for the year ended 31 December 2007, except for the adoption of the

following new and revised Hong Kong Financial Reporting Standards (“HKFRSs”)

(which also included HKASs and Interpretations), that affect the Group and are

adopted for the first time for the current period’s financial statements.

HK(IFRIC)-Int 11 HKFRS 2 — Group and Treasury Share Transactions

HK(IFRIC)-Int 12 Service Concession Arrangements

HK(IFRIC)-Int 14 HKAS 19 — The Limit on a Defined Benefit Asset,

Minimum Funding Requirements and their Interaction

HK(IFRIC)-Int 11 requires arrangements whereby an employee is granted rights

to the Group’s equity instruments to be accounted for as an equity-settled scheme,

even if the Group acquires the instruments from another party, or the shareholders

provide the equity instruments needed. HK(IFRIC)-Int 11 also address the

accounting for share-based payment transactions involving two or more entities

within the Group. As the Group currently has no such transactions, the interpretation

is unlikely to have any impact on the Group.

Interim Report2008

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NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIALSTATEMENTS (CONTINUED)30 June 2008

1. BASIS OF PREPARATION AND ACCOUNTING POLICIES (Continued)

HK(IFRIC)-Int 12 requires an operator under public-to-private service concession

arrangements to recognise the consideration received or receivable in exchange

for the construction services as a financial assets and/or an intangible asset,

based on the terms of the contractual arrangements. HK(IFRIC)-Int 12 also

addresses how an operator shall apply existing HKFRSs to account for the

obligations and the rights arising from service concession arrangements by which

a government or a public sector entity grants a contract for the construction of

infrastructure used to provide public services and/or for the supply of public

services. As the Group currently has no such arrangements, the interpretation is

unlikely to have any financial impact on the Group.

HK(IFRIC)-Int 14 addresses how to assess the limit under HKAS19 Employee

Benefits on the amount of a refund or a reduction in future contributions in relation

to a defined benefit scheme that can be recognised as an asset, in particular,

when a minimum funding requirement exists. As the Group currently has no

defined benefit scheme, HK(IFRIC)-Int 14 is not applicable to the Group and

therefore are unlikely to have any financial impact on the Group.

There was no material impact on the basis of preparation of the unaudited

condensed consolidated balance sheet and condensed income statement arising

from the above-mentioned accounting standards.

Interim Report2008

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Impact of issued but not yet effective HKASs and HKFRSs

The Group has not applied the following new and revised HKASs and HKFRSs,

which have been issued but not yet effective, in these interim financial statements:

HKAS 1 (Revised) Presentation of Financial Statements1

HKAS 1 and HKAS 32 Puttable Financial Instruments and Obligations arising

(Amendments) on Liquidation1

HKAS 23 (Revised) Borrowing Costs1

HKAS 27 (Revised) Consolidated and Separate Financial Statements3

HKFRS 2 (Amendment) Share-based Payments — Vesting Conditions and

Cancellations1

HKFRS 3 (Revised) Business Combinations3

HKFRS 8 Operating Segments1

HK(IFRIC)-Int 13 Customer Loyalty Programmes2

1 Effective for annual periods beginning on or after 1 January 20092 Effective for annual periods beginning on or after 1 July 20083 Effective for annual periods beginning on or after 1 July 2009

HKAS 1 (Revised) will affect the presentation of owner changes in equity and

comprehensive income. The revised standard will use “statement of financial

position” and “statement of cash flows” to replace the titles “balance sheet” and

“cash flow statement”, and in making reference to these two statements within

a complete set of financial statements.

The amendment to HKAS 1 requires disclosure of certain information relating to

puttable instruments classified as equity. The amendment to HKAS 32 requires

certain puttable financial instruments and obligations arising on liquidation to be

classified as equity if certain criteria are met. The Group does not expect these

amendments to impact the financial statements of the Group.

Interim Report2008

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Impact of issued but not yet effective HKASs and HKFRSs (Continued)

HKAS 23 has been revised to require capitalisation of borrowing costs when such

costs are directly attributable to the acquisition, construction or production of a

qualifying asset. As the Group’s current policy for borrowing costs aligns with the

requirements of the revised standard, the revised standard is unlikely to have any

financial impact on the Group.

HKAS 27 (Revised) requires that a change in the ownership interest of a subsidiary

be accounted for as an equity transaction. Therefore, such a change will have no

impact on goodwill, nor will it give raise to a gain or loss. Furthermore, the revised

standard changes the accounting for losses incurred by subsidiaries as well as

the loss of control of a subsidiary. The changes introduced by the revised standard

must be applied prospectively and will affect future acquisitions and transactions

with minority interest.

HKFRS 2 (Amendment) restricts the definition of “vesting condition” to a condition

that includes an explicit or implicit requirement to provide services. Any other

conditions are non-vesting conditions, which have to be taken into account to

determine the fair value of the equity instruments granted. In the case that such

award does not vest as the result of a failure to meet a non-vesting condition that

is within the control of either the entity or the counterparty, this must be accounted

for as a cancellation.

HKFRS 3 (Revised) introduces a number of changes in the accounting for business

combinations that will impact the amount of goodwill recognised, the reported

results in the period that an acquisition occurs and future reported results. The

changes introduced by the revised standard must be applied prospectively and

will affect future acquisitions and transactions with minority interest.

Interim Report2008

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Impact of issued but not yet effective HKASs and HKFRSs (Continued)

HKFRS 8, which will replace HKAS 14 Segment Reporting, specifies how an entity

should report information about its operating segments, based on information

about the components of the entity that is available to the chief operating decision

maker for the purposes of allocating resources to the segments and assessing

their performance. The standard also requires the disclosure of information about

the products and services provided by the segments, the geographical areas in

which the Group operates, and revenue from the Group’s major customers.

HK(IFRIC)-Int 13 requires that loyalty award credits granted to customers as part

of a sales transaction are accounted for as a separate component of the sales

transaction. The consideration received in the sales transaction is allocated between

the loyalty award credits and the other components of the sale. The amount

allocated to the loyalty award credits is determined by reference to their fair value

and is deferred until the awards are redeemed or the liability is otherwise

extinguished. As the Group currently has no customer loyalty award credits,

HK(IFRIC)-Int 13 is not applicable to the Group and therefore are unlikely to have

any financial impact on the Group.

The Group is in the process of making an assessment of the impact of these new

and revised HKFRSs upon initial application. Up to the date of this report, it has

concluded that these new and revised HKFRSs are unlikely to have a significant

impact on the Group’s results of operations and financial position.

Interim Report2008

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2. SEGMENT INFORMATION

Segment information is presented by way of the Group’s primary segment reporting

basis, by business segment. In determining the Group’s geographical segments,

revenues are attributed to the segments based on the location of the customers,

and assets are attributed to the segments based on the location of the assets.

No further geographical segment information is presented as over 90% of the

Group’s revenue is derived from customers based in Mainland China, and over

90% of the Group’s assets are located in Mainland China.

The Group’s operating businesses are structured and managed separately

according to the nature of their operations and the products and services they

provide. Each of the Group’s business segments represents a strategic business

unit that offers products and services which are subject to r isks and returns that

are different from those of the other business segments. Summary details of the

five business segments are as follows:

(a) the “Agricultural machinery” segment engages in the manufacture and

sale of agricultural machinery, including tractors, harvesters, relevant

parts and components;

(b) the “Construction machinery” segment engages in the manufacture and

sale of construction and road machinery;

(c) the “Financial operations” segment engages in the provision of loan lending,

bills discounting and deposit-taking services;

(d) the “Diesel engines and fuel jets” segment engages in the manufacture

and sale of diesel engines and fuel injection pumps; and

(e) the “Others” segment comprises, principally, the manufacture and sale of

biochemical products.

Interim Report2008

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2. SEGMENT INFORMATION (Continued)

The following table presents revenue and results for the Group’s primary segments:

Agricultural Construction Financial Diesel engines

machinery machinery operations and fuel jets Others Eliminations Consolidated

For the six months ended 30 June

2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007

Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited

RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000

Segment revenue:

Sales to external customers 2,656,944 2,435,904 894,016 821,275 — — 489,725 338,523 — — — — 4,040,685 3,595,702

Intersegment revenue 323,195 196,090 37,069 10,198 9,029 8,765 247,626 170,030 — — (616,919 ) (385,083 ) — —

Other income and gains — — — — 22,160 12,398 — — — — — — 22,160 12,398

Total 2,980,139 2,631,994 931,085 831,473 31,189 21,163 737,351 508,553 — — (616,919 ) (385,083 ) 4,062,845 3,608,100

Segment results 95,253 83,571 (40,544) (11,838) 21,402 14,282 80,510 48,548 — (141 ) — — 156,621 134,422

Interest, dividend and

investment income 9,270 82,835

Gain on disposal of a subsidiary — 90

Unallocated expenses (16,019 ) (18,516 )

Finance costs (21,568 ) (14,979 )

Share of profits and

losses of associates — — — — — — — — (2,111 ) (3,150 ) — — (2,111 ) (3,150 )

Profit before tax 126,193 180,702

Tax (38,908 ) (50,819 )

Profit for the period 87,285 129,883

Interim Report2008

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3. REVENUE, OTHER INCOME AND GAINS

Revenue, which is also the Group’s turnover, represents the invoiced value of

goods sold, net of trade discounts and returns, and excludes sales taxes and intra-

group transactions.

An analysis of revenue, other income and gains is as follows:

For the six months

ended 30 June

2008 2007

Unaudited Unaudited

RMB’000 RMB’000

Revenue

Sales of goods 4,040,685 3,595,702

Other income

Bank interest income 5,073 1,076

Interest income from

financial operations 21,711 11,468

Profit from sundry sales 22,276 15,904

Rental income 865 2,445

Dividend income from

listed investments 59 70

Others 16,942 15,866

66,926 46,829

Interim Report2008

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3. REVENUE, OTHER INCOME AND GAINS (Continued)

For the six months

ended 30 June

2008 2007

Unaudited Unaudited

RMB’000 RMB’000

Gains

Gain on disposal of available-for-sale

investment 4,138 73,780

Gain on disposal of listed equity

investments at fair value

through profit or loss, net — 5,730

Fair value gain on listed equity

investments at fair value

through profit or loss, net — 2,179

Gain on disposal of a subsidiary — 90

4,138 81,779

71,064 128,608

4. FINANCE COSTS

For the six months

ended 30 June

2008 2007

Unaudited Unaudited

RMB’000 RMB’000

Interest on bank and other loans 21,568 14,979

Interim Report2008

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5. PROFIT BEFORE TAX

Profit before tax is arrived at after charging/(crediting):

For the six monthsended 30 June

2008 2007Unaudited Unaudited

RMB’000 RMB’000

Depreciation 61,010 54,549Impairment of property, plant and equipment 11,000 —Provision for impairment of

trade receivables, net 18,337 17,469Loss/(gain) on disposal of listed equity

investments at fair valuethrough profit or loss, net 10,502 (5,730)

Fair value loss/(gain) on listed equity investmentsat fair value through profit or loss, net 4,208 (2,179)

Interest expense from financial operations 3,006 1,094Provision for other receivable 1,192 781Net charge/(reversal) for impairment losses

and allowances for bills discounted receivable 717 (1,345)Amortisation of prepaid land premiums 590 366Loss on disposal of items of property,

plant and equipment 227 2,227Interest income from financial operations (21,711) (11,468)Bank interest income (5,073) (1,076)Gain on disposal of available-for-sale investment (4,138) (73,780)Reversal of provision against obsolete

inventories, net (3,434) (4,022)Gross rental income (865) (2,445)Net charge/(reversal) for impairment losses and

allowances for loans receivable (537) 1,676Dividend income from listed investments (59) (70)Gain on disposal of a subsidiary — (90)

Interim Report2008

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6. TAX

For the six months

ended 30 June

2008 2007

Unaudited Unaudited

RMB’000 RMB’000

Group

Current—PRC corporate income tax 48,825 62,233

Deferred tax (9,917) (11,414)

Total tax charge for the period 38,908 50,819

No provision for Hong Kong profits tax has been made as the Group had no

assessable profits arising in Hong Kong during the two periods ended 30 June

2008 and 2007.

The PRC corporate income tax for the Company and the majority of its subsidiaries

is calculated at rates ranging from 18% to 25% (six months ended 30 June 2007:

10% to 33%) on their estimated assessable profits for the period, based on

existing legislation, interpretations and practices in respect thereof.

Profits tax of the subsidiary operating outside the Mainland China is subject to

the rates applicable within the jurisdiction in which it operates. No provision for

overseas profits tax has been made for the Group as there were no overseas

assessable profits for the period (six months ended 30 June 2007: Nil).

Interim Report2008

18


7. DIVIDEND

The Board does not recommend the payment of any interim dividend for the six

months ended 30 June 2008 (six months ended 30 June 2007: Nil).

8. EARNINGS PER SHARE ATTRIBUTABLE TO ORDINARY EQUITYHOLDERS OF THE PARENT

The calculation of basic earnings per share for the six months ended 30 June 2008

is based on the profit for the period attributable to ordinary equity holders of the

parent of approximately RMB77,943,000 (six months ended 30 June 2007:

RMB119,730,000) and the weighted average of 845,900,000 (six months ended

30 June 2007: 785,000,000) ordinary shares in issue during the period.

Diluted earnings per share amounts for both periods ended 30 June 2008 and

2007 have not been disclosed as no diluting events existed during both periods.

9. PROPERTY, PLANT AND EQUIPMENT

During the six months ended 30 June 2008, the Group acquired construction in

progress and items of property, plant and equipment in an aggregate amount of

approximately RMB59.2 million (six months ended 30 June 2007: RMB69.1 million)

and disposed of items of property, plant and equipment with an aggregate net

book value of approximately RMB8.3 million (six months ended 30 June 2007:

RMB19.5 million) and resulted in a net loss on disposal of approximately RMB0.2

million (six months ended 30 June 2007: RMB2.2 million). Impairment of items

of property, plant and equipment recognised in the condensed consolidated

income statement during the period was RMB11.0 million (six months ended 30

June 2007: Nil).

At 30 June 2008, certain of the Group’s buildings and machinery with an aggregate

net carrying value of approximately RMB61,133,000 (31 December 2007:

RMB62,321,000) were pledged to secure certain short term bank loans granted

to the Group.

Interim Report2008

19


10. PREPAID LAND PREMIUMS

The leasehold lands are held under a medium term leases and is situated in

Mainland China.

At 30 June 2008, certain of the Group’s prepaid land premiums with an aggregate

net carrying value of approximately RMB7,991,000 (31 December 2007:

RMB8,095,000) were pledged to secure bank loans granted to the Group.

11. LOANS RECEIVABLE

As at 30 June 2008 As at 31 December 2007

Impairment Impairment

Gross allowances Net Gross allowances Net

Unaudited Unaudited Unaudited Audited Audited Audited

Notes RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000

Loans to the Holding (a) 302,800 4,338 298,462 252,800 4,803 247,997

Loans to related companies (b) 78,634 5,242 73,392 24,503 5,107 19,396

Loans to customers (c) 14,219 2,211 12,008 12,794 2,418 10,376

395,653 11,791 383,862 290,097 12,328 277,769

Portion classified

as current assets (177,580 ) (8,667 ) (168,913 ) (205,255 ) (11,040 ) (194,215 )

Long term portion 218,073 3,124 214,949 84,842 1,288 83,554

Interim Report2008

20


11. LOANS RECEIVABLE (Continued)

Notes:

(a) The loans to the holding company, China Yituo Group Corporation Limited (“the Holding”),

are granted by China First Tractor Group Finance Company Limited (“FTGF”), a subsidiary

of the Group, and are unsecured, bear interest at rates ranging from 6.57% to 7.56% (31

December 2007: 6.39% to 6.56%) per annum and repayable within one to five years (31

December 2007: one to five years).

(b) The loans to related companies represent the loans granted by FTGF to the companies which

the Holding has significant influence therein. These loans are unsecured, interest-bearing at

rates ranging from 6.70% to 9.71% (31 December 2007: 6.67% to 9.11%) per annum and are

repayable within one to five years (31 December 2007: one to five years).

(c) The loans to customers represent the loans granted to the specific customers as permitted by

the People’s Bank of China (the “PBOC”).

The maturity profile of the Group’s loans receivable at the balance sheet date is

analysed by the remaining periods to their contractual maturity dates as follows:

As at As at

30 June 31 December

2008 2007

Unaudited Audited

RMB’000 RMB’000

Repayable:

Within three months 106,740 125,855

Within one year but over three months 70,840 79,400

Within five years but over one year 216,626 83,266

Over five years 1,447 1,576

395,653 290,097

Interim Report2008

21


12. TRADE AND BILLS RECEIVABLES

The Group’s trading terms with its customers are mainly on credit, where payment

in advance from customers is normally required. The credit periods granted to its

customers are 30 to 90 days.

An aged analysis of the trade and bills receivables as at the balance sheet date,

based on invoice date, and net of provisions, is as follows:

As at As at

30 June 31 December

2008 2007

Unaudited Audited

RMB’000 RMB’000

Within 90 days 1,093,919 654,962

91 days to 180 days 257,874 162,067

181 days to 365 days 51,096 73,205

1 to 2 years 37,194 32,681

Over 2 years 3,437 3,031

1,443,520 925,946

Included in the trade and bills receivables of the Group as at 30 June 2008 are

trade receivables from the associates of approximately RMB261,000 (31 December

2007: RMB4,123,000).

Included in the trade and bills receivables of the Group as at 30 June 2008 are

trade receivables from the Holding of approximately RMB10,000 (31 December

2007: RMB383,000).

As at 30 June 2008, certain of the Group’s bills receivables of approximately

RMB55,759,000 (31 December 2007: RMB57,035,000) were pledged for the

issuance of bills payable.

Interim Report2008

22


13. BILLS DISCOUNTED RECEIVABLE

The bills discounted receivable arose from the Group’s financial operation. Included

in the bills discounted receivable (net of impairment) of the Group are approximately

RMB83,358,000 (31 December 2007: RMB53,559,000) related to the Holding and

approximately RMB41,580,000 (31 December 2007: RMB693,000) related to

related companies.

The maturity profile of the Group’s bills discounted receivable at the balance sheet

date is analysed by the remaining periods to their contractual maturity dates as

follows:

As at As at

30 June 31 December

2008 2007

Unaudited Audited

RMB’000 RMB’000

Maturing:


Within six months

but over three months 41,566 50,000

128,286 56,619

Less: Impairment allowance (1,283) (566)

127,003 56,053

Interim Report2008

23


14. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES

(a) Included in other debtors are other receivables due from the minority

shareholders of certain subsidiaries of the Group of approximately

RMB27,709,000 (31 December 2007: RMB29,602,000). Included in such

balance is an amount of RMB23,089,000 (31 December 2007:

RMB26,152,000) due from Jiangsu Huatong Machinery Co., Ltd.

(“Huatong”) (a minority shareholder of Zhenjiang Huachen Huatong Road

Machinery Company Limited (“ZHHRM”), a subsidiary of the Group) to

ZHHRM, of which RMB18,382,000 has been overdue and not yet settled

as at the date of these condensed financial statements. Pursuant to an

agreement between Huatong and the Holding dated 27 March 2007,

Huatong has agreed in writing to repay the part of balance due to ZHHRM

of RMB18,382,000 by 31 December 2007 and has pledged its equity

interest in ZHHRM to the Holding for securing such balance of

RMB18,382,000 due from Huatong, and the Holding in turn guaranteed

that any proceeds on disposal of such equity interest in Huatong will be

solely used to compensate for any loss suffered by ZHHRM should Huatong

ultimately default in payment to ZHHRM.

The directors are of the view that the outstanding balance due from

Huatong is recoverable, and therefore no provision has been made in

respect thereof.

Other balances are unsecured and interest-free, and have no fixed terms

of repayment.

(b) Other receivables included a balance due from the Holding of

RMB109,974,000 (31 December 2007: RMB109,221,000), and such

balance is unsecured, interest-free and have no fixed terms of repayment.

Interim Report2008

24


15. CASH AND CASH EQUIVALENTS AND PLEDGED DEPOSITS

As at As at

30 June 31 December

2008 2007

Unaudited Audited

RMB’000 RMB’000

Cash and bank balances — Note (a) 769,637 987,148

Mandatory reserve deposits

with the PBOC — Note (b) 89,534 85,952

Time deposits 285,273 225,624

1,144,444 1,298,724

Less: Pledged time deposits (263,254) (151,640)

881,190 1,147,084

Notes:

(a) The balance included FTGF’s placements with the PBOC and other banks of approximately

RMB103,951,000 (31 December 2007: RMB356,437,000) and RMB209,216,000 (31 December

2007: RMB186,543,000), respectively.

(b) The balance represents mandatory reserve deposits placed with the PBOC. In accordance with

the regulations of the PBOC, such balance should be no less than a specific percentage of the

amounts of the customer deposits placed with FTGF. Such mandatory reserve deposits are not

available for use in the Group’s day-to-day operations.

Interim Report2008

25


15. CASH AND CASH EQUIVALENTS AND PLEDGED DEPOSITS(Continued)

The maturity profile of the Group’s time deposits at the balance sheet date is

analysed by the remaining periods to their contractual maturity dates as follows:

As at As at

30 June 31 December

2008 2007

Unaudited Audited

RMB’000 RMB’000

Maturing:


Within one year but over three months 10,000 11,227

285,273 225,624

Interim Report2008

26


16. TRADE AND BILLS PAYABLES

An aged analysis of trade and bills payable as at the balance sheet date, based

on invoice date, is as follows:

As at As at

30 June 31 December

2008 2007

Unaudited Audited

RMB’000 RMB’000

Within 90 days 1,259,882 787,267

91 days to 180 days 239,227 209,153

181 days to 365 days 70,968 57,333

1 to 2 years 29,389 49,326

Over 2 years 46,623 40,986

1,646,089 1,144,065

The Group’s bills payables amounting to approximately RMB324,850,000 (31

December 2007: RMB231,117,000) are secured by the pledge of certain of the

Group’s deposits amounting to approximately RMB249,570,000 (31 December

2007: RMB147,168,000).

Included in the trade and bills payables of the Group are trade payables to the

Holding and the associates of approximately RMB11,135,000 (31 December

2007: RMB12,093,000) and RMB449,000 (31 December 2007: Nil), respectively.

Interim Report2008

27


17. OTHER PAYABLES AND ACCRUALS

Included in other payables and accruals of the Group are amounts due to the

Holding and minority shareholders of subsidiaries of the Group of approximately

RMB79,218,000 (31 December 2007: RMB64,335,000) and RMB19,945,000 (31

December 2007: RMB29,190,000), respectively. Such balances are unsecured,

interest-free and have no fixed terms of repayment.

18. CUSTOMER DEPOSITS

As at As at

30 June 31 December

2008 2007

Unaudited Audited

RMB’000 RMB’000

Deposits from the Holding 89,123 83,310

Deposits from associates 1,268 469

Deposits from related companies 33,538 44,903

Deposits from customers 4,560 2,549

128,489 131,231

Interim Report2008

28


18. CUSTOMER DEPOSITS (Continued)

The maturity profile of the Group’s customer deposits at the balance sheet date

is analysed by the remaining periods to their contractual maturity as follows:

As at As at

30 June 31 December

2008 2007

Unaudited Audited

RMB’000 RMB’000

Repayable:

On demand 127,591 127,584

Within three months — 143

Within one year but over three months 48 2,659

Over one year 850 845

128,489 131,231

Interim Report2008

29


19. CONTINGENT LIABILITIES

(a) As at 30 June 2008, ZHHRM had outstanding guarantee to the extent of

RMB14 million (31 December 2007: RMB14 million) provided to a bank

for securing the loan granted to a previous customer of the Group. The

borrower has defaulted in repayment of the bank loan when it was due

on 28 October 2007. Certain receivable of RMB19 million owed to the

borrower was frozen by a court order since then for the purpose of

settlement of the bank loan. On 24 December 2007, Huatong has expressed

to the court its willingness to provide a counter-guarantee to ZHHRM to

use certain of its land use rights to settle the bank loan. In addition,

ZHHRM has received a court order on 26 September 2007 to freeze its

assets amounting to RMB16 million for securing the settlement of the bank

loan, and actually ZHHRM’s bank balance of RMB761,200 was frozen as

at 30 June 2008. The directors are of the view that such guarantee will

not have material adverse effect on the Group, and therefore no provision

has been made in respect thereof.

(b) As at 30 June 2008, FTGF provided guarantees to the extent of RMB9

million (31 December 2007: Nil) to certain financial institutions for securing

loans granted to Yituo International Commerce Company Limited (“YICC”),

a subsidiary of the Holding.

Save as disclosed above, the Group did not have any other significant contingent

liabilities.

Interim Report2008

30


20. CAPITAL COMMITMENTS

The Group had the following capital commitments at the balance sheet date:

As at As at

30 June 31 December

2008 2007

Unaudited Audited

RMB’000 RMB’000

Contracted, but not provided for:

Purchase of plant and machinery 92,420 86,167

Investment in an associate — 4,000

92,420 90,167

Authorised, but not contracted for:

Purchases of land use rights 255,900 255,900

Purchase of plant and machinery 850,160 895,466

Investment in a joint venture 120,526 120,526

1,226,586 1,271,892

1,319,006 1,362,059

Interim Report2008

31


21. RELATED PARTY TRANSACTIONS

In addition to the transactions and balances detailed elsewhere in these condensed

consolidated interim financial statements, the Group had the following material

transactions with related parties during the period.

(a) The significant transactions carried out between the Group and the

Holding group, inclusive of subsidiaries and associates of the Holding,

during the period are summarised as follows:

For the six months

ended 30 June

2008 2007

Unaudited Unaudited

RMB’000 RMB’000

Sales of raw materials,

finished goods and components 415,241 305,452

Purchases of raw materials

and components 499,561 445,960

Purchases of utilities 59,908 55,807

Fees paid for welfare and

support services 12,790 10,746

Purchases of transportation services 17,517 11,456

Research and development

expenses paid 15,203 29,098

Fees paid for the use of land 3,911 2,500

Fees paid for the use of trademark 10,229 8,475

Rentals paid for buildings 5,801 832

Sales of plant and machinery — 9,718

Purchases of plant and machinery 984 4,516

Interest income, inclusive of

discounted bill charges 18,778 10,570

Interest paid for customer deposits 387 954

Service charge for guarantees 72 —

Interim Report2008

32


21. RELATED PARTY TRANSACTIONS (Continued)

(a) The significant transactions carried out between the Group and the

Holding group, inclusive of subsidiaries and associates of the Holding,

during the period are summarised as follows: (Continued)

The transactions disclosed above also included the transactions between

the Group and an associate, Yituo (Luoyang) Casting & Forging Company

Limited (“YLCF”) (in which the Holding holds a 50% equity interest) for

period ended 30 June 2007.YLCF has become a wholly-owned subsidiary

of the Holding in November 2007.

(b) Other transactions with related parties

(i) Designated deposits and designated loans

As at 30 June 2008, the Holding placed a designated deposit of

approximately RMB15.6 million (31 December 2007: RMB19.9

million) in FTGF for lending to subsidiaries of the Holding.

As at 30 June 2008, the Holding placed a designated deposits of

approximately RMB30 million (31 December 2007: RMB30 million)

in FTGF for lending to an associate of the Holding.

As at 30 June 2008, YICC placed a designated deposit of RMB2

million (31 December 2007: RMB2 million) in FTGF for lending to

a third party.

Since the credit risk is borne by the depositors, the related assets

and liabilities of such transactions are not included in the Group’s

condensed consolidated interim financial statements.

Interim Report2008

33



(b) Other transactions with related parties (Continued)

(ii) Guarantees provided by the Group to related parties

As at 30 June 2008, FTGF provided guarantees to the extent of

RMB9 million (31 December 2007: Nil) to certain financial institutions

for securing loans granted to YICC.

(iii) Guarantees provided by related par ties to the Group

As at 30 June 2008, the Holding provided a guarantee to the extent

of RMB280 million (31 December 2007: RMB260 million) to banks

for securing the banking facilities granted to the Company. As at

30 June 2008, the aforesaid banking facilities were utilised to the

extent of RMB280 million (31 December 2007: RMB260 million).

(c) Outstanding balances with related parties

(i) Details of the Group’s amount due from/to the Holding, its loans

and deposits balances with the Holding as at the balance sheet

date are disclosed in notes 14, 17, 11 and 18 to the condensed

consolidated interim financial statements.

(ii) Details of the Group’s deposits received from its associates as at

the balance sheet date are included in notes 18 to the condensed

consolidated interim financial statements.

(iii) Details of the Group’s trade balances with its related parties as

at the balance sheet date are disclosed in notes 12 and 16 to the

condensed consolidated interim financial statements.

(iv) Details of the Group’s amounts due from/to the minority

shareholders as at the balance sheet date are disclosed in notes

14 and 17 to the condensed consolidated interim financial

statements.

Interim Report2008

34



(d) Compensation of key management personnel of the Group

For the six months

ended 30 June

2008 2007

Unaudited Unaudited

RMB’000 RMB’000

Shor t term employee benefits 642 575

Post-employment benefits 128 121

Total compensation paid/payable

to key management personnel 770 696

22. POST BALANCE SHEET EVENTS

There is no significant post balance sheet events subsequent to the period ended

30 June 2008.

23. APPROVAL OF THE INTERIM FINANCIAL REPORT

These unaudited condensed consolidated interim financial statements were

approved and authorised for issue by the board of directors on 22 August 2008.

Interim Report2008

35

BUSINESS REVIEW

During the Repor ting Period, despite a series of serious natural calamities and the

continued implementation of appropriate tight monetary policy by the State, the overall

national economic development of our State remained steady and relatively rapid. The

gross domestic product (“GDP”) recorded a year-on-year increase of 10.4%, but the level

of increase was lowered by 1.8%. In 2008, the State has continued to perfect the policies

that support and provide favorable treatment to agriculture. For the purpose of agricultural

modernization, the State has put further effor t on subsidizing for the purchase of agricultural

machinery, providing subsidies of up to RMB4 billion with the amount of funding further

increased, and the subsidizing scope and variety further extended, which have further

invoked enthusiasm of peasants for the cultivation of grains and purchase of agricultural

machinery. In the first half of the year, the sales volume of large and medium tractors

in the industry recorded a year-on-year growth of 19.7%, among which, the sales of

medium and large wheeled tractors and the sales of medium wheeled tractors recorded

year-on-year growth of 37.6% and 10% respectively. Besides, a year-on-year growth of

74.3% was recorded in the sales volume of wheat harvesters, attributable to improvements

and increase in functions which enable the harvest of additional crops, etc. The consolidated

mechanization level of tilling, planting and harvesting in the People’s Republic of China

(the “PRC”) reached 43%, representing an increase of 2% as compared with that of 2007.

Prejudiced by the State’s emphasis on the support for the development of large and

medium horsepower tractors and power enhancement of products, the sales volume of

small wheeled tractors recorded a year-on-year decrease of 10.6%. Taking advantage of

the new construction of countryside, the continued progression of urbanization and the

commencement of large-scale infrastructure projects one after another, as well as

progression of demands for exports, the construction machinery industry maintained a

strong momentum. However, due to the increased pressure on obtaining profits in the

industry arising from the price hikes in raw materials and energy, a year-on-year decrease

was recorded in profit.

The Group proactively responded to the changes in business environment during the

Reporting Period by unswervingly taking structural adjustment as paramount and focusing

on building up its core capability, continuously boosting quality management, cost

management, procurement management and sales and marketing management through

innovations in technology, management, system and culture, so as to eliminate unfavorable

factors such as price hikes in raw materials, enhance budget management and sharpen

the Group’s competitive edge continuously.

Interim Report2008

36

BUSINESS REVIEW (CONTINUED)

Expedite the adjustment of product mix through technological and management

innovation. During the Reporting Period, the Group pressed ahead actively the construction

of key projects, the construction of certain investment projects which have significant

influences on adjustment in the product mix of the Group have either been completed

or commenced. The technological innovation of large wheeled tractors and high pressure

forged steel crankshaft production line had been completed, while the information system

construction projects was advancing orderly. Meanwhile, the technological innovation

project of heavy power duty diesel machines had been fully started up. The effects of

technological innovations of large wheeled tractors had begun to reveal. The Group sold

a total of 15,136 units of large wheeled tractors in the first half of the year, representing

an increase of 62.4% over the same period last year.

Improve international marketing strategy to speed up the adjustment of market

structure. During the Reporting Period, the Group further improved the international

marketing strategy and put more efforts in the exploration of major international markets

including North America, Eastern Europe and West Asia. The Group completed construction

of 6 entrepot storages, and 17 overseas distributors have newly joined. By bringing the

performance-price ratio advantage into full play, the Company advanced the progress of

product certification, in line with the requirement of target market. Meanwhile, it strengthened

the construction of marketing channels and service network in the international market,

products in series and sizable export setting having been formed basically. Further, it

optimized the structure of export products. Accordingly, 2,140 units of large wheeled

tractors with higher added value and 3,470 units of various products were exported,

representing an increase of 310% and 145.7% respectively over the same period last

year. The Company achieved export sales of US$61,790,000, up by 126.6% over the

same period last year.

Interim Report2008

37


Push ahead product research and development and quality improvement to

continually enhance independent innovation ability. During the Reporting Period, the

Group formulated and implemented the 2008 Research and Development Plan for New

Products, 2008 Adaptability Improvement Plan for Export Product of Large and Medium

Wheeled Tractors. By standardizing process discipline and strengthening key technology

development, the Group boosted products standards gradually. In addition, the Group

attached more impor tance on the research and development of new products and

improvement of traditional products. During the Reporting Period, 41 product development

projects was approved, of which the system analysis, function design and parts development

for diesel engine electronic control project had been completed. Great progresses had

been made in key projects including the research and development of new generation

160-200 horsepower wheeled tractors, development of new generation 70-90 horsepower

series wheeled tractors, 5 aspects of improvements in 東方紅-LG1304/1504 series tractors

and development of 東方紅-C1602 second generation model machine.

Enhance cost and procurement management to alleviate effectively the pressures

from price hikes. During the Reporting Period, the Group, amid the rising raw material

price and hiking cost, capitalized its scale advantage and improved its procurement

management. Meanwhile, in line with the market trend and climatizing the seasonal

features, the Group carried out strategic reserves and built up reserves continually for

bulk materials such as pig iron, tyre and steel products, etc, which have relatively

significant impact on the manufacturing cost, thus lowering the procurement cost effectively.

The Group formulated and executed the Value Engineering Project Proposal and established

the cost accounting model. Based on the cost analysis to procurement of key materials,

production and sales, the cost control ability of the Group was further improved, achieving

the dynamic management on cost analysis. By virtue of above measures, the impact from

surging raw material price on the Group’s profitability was lowered effectively.

During the Repor ting Period, the Group recorded a turnover of RMB4,040,685,000,

representing an increase of 12.4% over the same period last year. Earnings attributable

to equity holders of the parent was RMB77,943,000, representing a decrease of

RMB41,787,000 from the same period last year, or an increase of 11% (taking no account

of the one-off investment income from disposal of shares of Bank of Communications Co.,

Ltd.). Earnings per share was RMB9.21 cents.

Interim Report2008

38


Agricultural machinery business: During the Reporting Period, in light of the change

of domestic agricultural machinery market, the Group furthered the structural adjustment

of products and the market, focused on improving internal management in various

aspects, endeavored to create new networking mode, promoted the integration and

optimization of marketing resources. The Group’s total sales of agriculture machines of

different modes amounted to 68,369 units, of which the sales of large and medium tractors

amounted to 27,630 units, representing a growth of 29.8% as compared to the corresponding

period last year. Sales of small wheeled tractors amounted to 37,677 units, representing

a year-on-year decrease of 19.6%, while sales of harvesters amounted to 1,132 units,

representing a year-on-year growth of 59.7%. 2,713 units of various types of agricultural

machineries were exported, representing an increase of 190.34% as compared to the

same period last year. During the Reporting Period, the turnover of agricultural machinery

business of the Group amounted to RMB2,656,944,000, representing a year-on-year

growth of 9.1%. The operating results increased by 14% as compared to the corresponding

period last year.

The growth in turnover and operating results of agricultural machinery business was

primarily attributable to: The Group sold 15,156 units of large wheeled tractors with higher

value addition, representing a year-on-year increase of 5,825 units or 62.4%, which is

24% higher than the industry growth. Market share of the Company’s large wheeled

tractors amounted to 31.7%, representing a year-on-year increase of approximately 5%.

The growth in sales of large wheeled tractors was mainly attributable to the popular

products in the 90-120 horsepower range, in which the Group enjoys a market share of

over 40%. By marketing integration with large wheeled tractors to share resources,

marketing efforts for medium wheeled tractors were strengthened. As a result, the Group

sold 11,086 units of medium wheeled tractors, representing a year-on-year increase of

1,056 units or 10.5% which held the line of industry growth, of which medium wheeled

tractors of 25-40 horsepower recorded a year-on-year increase of 28.7% in sales volume;

addressing the changing market demand, the Group focused on technology and product

upgrading to uplift selling prices and profitability of the small wheeled tractors, leading

to a year-on-year growth in turnover despite the diminished sales volume; and through

promoting inventories and extending functions, harvesting machinery products recorded

a noticeable growth.

Interim Report2008

39


Construction machinery business: According to the different market competitions faced

by various construction machinery products, the Group made specific improvements to

market and product structures as well as marketing strategies, so as to strengthen

international market development and integration of internal and external resources.

Sales volume of products such as large loaders, road rollers and road pavers achieved

year-on-year growths of approximately 55%, 18% and 14% respectively, with a significant

increase in market shares of road rollers and road pavers. Sales volume of small

construction machinery (small loaders and hydraulic excavators), however, decreased by

539 units year-on-year due to the intensifying industry competition and surging prices of

raw materials and energy. With a progress in international market development, the export

of different kinds of construction machinery products increased by 48% over the

corresponding period last year, where export of loaders posted a year-on-year growth of

69%. During the Reporting Period, the Group’s construction machinery business achieved

turnover of RMB894,016,000, representing an increase of 8.9% over the same period last

year. Nevertheless, due to factors such as the surging prices of raw materials, only a slight

increase in principal machinery and the lack of scale merit for certain product lines, the

construction machinery business still recorded a loss.

Engine machinery business: Grasping the opportunities from the fast growing agricultural

machinery and construction machinery markets during the Reporting Period, the Group

made full play of its brand and technology edges to continuously improve marketing and

services. The Group sold 58,188 units of diesel engines of various specifications (including

external sales of 38,831 units) representing a year-on-year growth of 44%, of which

approximately 68% was used as components of tractors, approximately 20% as components

of harvesting machinery, approximately 8% as components of construction machinery and

the remaining 5% as components of power generating units, automobile and vessel

engines. During the Reporting Period, the turnover (after elimination of inter-group sales)

of the engine machinery business of the Group increased by 44.7% year-on-year to

RMB489,725,000, realizing a relatively substantial growth in operation results over the

same per iod last year.

Interim Report2008

40


During the Reporting Period, the Group took a ser ies of initiatives including strategic

storage of raw materials, product restructuring, promoting large wheeled tractors and

other products with higher value addition, increasing product selling prices and stricter

cost control, to minimize the adverse impact on the Group’s profit from hiking prices of

raw materials and energy resources. During the Reporting Period, the Group recorded

a gross profit of RMB508,109,000, representing a year-on-year increase of 12%, with a

consolidated gross profit margin of 12.6% which held the line of the same period last year.

Compared to the year-on-year increase of 12.4% in turnover, the Group’s selling costs,

administrative expenses and finance costs for the Repor ting Period as a whole only

recorded an increase of 5.9% due to the improved management.

As at 30 June 2008, the Group’s trade and bills receivables increased by RMB517,574,000

as compared with last year, of which trade receivables increased by RMB534,861,000

and bills receivable decreased by RMB17,287,000. The increase in trade receivables

mainly resulted from the outstanding amount of the funding arising from the subsidy for

purchasing agricultural machinery for sales projects in the first half of 2008. Such subsidy

was delayed as it was allocated by the state progressively. However, it carried no risks

in recovery.

As at 30 June 2008, the Group enhanced inventory management and liquidated social

inventory, keeping the inventory under well control. With increase in sales volume, the

inventory increased by 5.4% over the same period last year. Due to the adjustment in

the inventory structure, long-term inventory of more than one year decreased by 31% over

the corresponding period last year.

Interim Report2008

41

FINANCIAL RATIO

30 June 31 December

Items Basis of calculation 2008 2007

Gearing ratio Total liabilities/Total assets x 100% 54.85% 49.84%

Current ratio Current assets/Current liabilities 1.49 1.61

Quick ratio (Current assets - inventories)/

Current liabilities 1.19 1.25

Debt equity ratio Total liabilities/

shareholders’ equity x 100% 130.10% 106.22%

Note: Shareholders’ equity (excluding minority interests)

BUSINESS PROSPECT

In the second half of 2008, in addition to the tight monetary policy which will be continued

to be adopted by the State for the purpose of curbing inflation, factors such as the

relatively great pressure from the price hikes in raw materials like steel, and the appreciation

of Renminbi, caused the amount of uncer tainties in the operation environment of macro

economy to maintain relatively large. As for the agricultural machinery industry, on the

basis that over 70% of the State’s subsidy for purchasing agricultural machinery was

implemented during the first half of the year, it is expected that the sales of agricultural

machinery is likely to slow down in the second half of the year. However, the prospect

of the agricultural market remains brightening as the State continues to focus on agricultural

development. The domestic construction machinery business remains its rapid momentum.

Besides, the reconstruction of Sichuan, the disaster area of the earthquake will drive the

demand for excavators, bulldozers and loaders. The Group will continue to implement the

operating strategy formulated in the beginning of the year through a series of measures,

including further funding for research and development, implementation of branding

strategy and acceleration of product structure adjustment. The Group will proactively

respond to the changing economy, optimize any opportunity and meet challenges.

Interim Report2008

42

BUSINESS PROSPECT (CONTINUED)

Agricultural machinery business: The Group will accelerate the development process

of high-tech, highly functional and highly valued-added products so as to continue to

consolidate and maintain the national leading position of high horsepower wheeled

tractors. The focus of the market in the second half of the year is to strengthen the

markets of Xinjiang and Heilongjiang. Furthermore, products of medium wheeled tractors

shall be improved and the improvement of medium wheeled tractors with 25-40 horsepower

which are popular in the market shall be accelerated. A higher performance-price ratio

of such shall also be obtained to sharpen its competitive edge in the market. The Group

will continue its integration of sales and marketing, better its sales network and realize

the common share of predominant resources. By speeding up the upgrade of crawler

tractors technology and products as well as the improvement of its modified products,

the Group will make a breakthrough in the crawler machinery business. The Group will

consummate and promote product certification, and take initiatives in international market

seizure.

Construction machinery business: The Group will actively respond to the challenge of

price hikes in raw materials, create synergy effect through the integration of internal

resources, enhancing asset efficiency and lowering operating cost. Additionally, by taking

advantage of the strengths in performance-to-price ratio, the Group will set foot in the

international market and expand its sales. Improvement in capital management and cost

control will help enhance the quality of economic operations. The operating results has

been remarkably improved by fur thering product structure adjustment, enhancing the core

competitiveness of the main products, developing products to meet the demand of export

and domestic high-end market and increasing sales volume of high-value added products.

Engine machinery business: The Group will respond to the need of technological

improvement of power upgrades and energy saving of diesel machines not used for road

machineries, expedite the research and development of products with high value, high

power, low emission, little noise generation and low fuel consumption, focus on the

development of the electronic control system of diesel engines and to make a breakthrough

in the auxiliary product market of engine machinery and vehicles. Besides, to ensure a

stable growth in the export business, the Group will accelerate the project of technical

transformation of high-power agricultural diesel machines and stabilize the product

technology of the S series diesel machines.

Interim Report2008

43

BUSINESS PROSPECT (CONTINUED)

International business: On top of enhancing market segmentation and product adaptation

levels, the Group is committed to speed up the improvement of its machinery products

to meet the needs of the international market. With spare parts and service being the

paramount, the Group will focus on auxiliaries, capacity and quality, to perfect the

structure of products for export and further its expansion in major international markets.

Furthermore, the Group will further improve its sales and marketing network and after-

sales service system, formulate a new assessment system of overseas distributors and

enhance feedback measures in the international market, to provide support for the

sustainable growth of international business.

The Board of the Company believes that, through adopting the abovementioned business

strategies, the Group will develop steadily in the second half of the year and will achieve

its operating target in 2008.

CONTINGENT LIABILITIES

As at 30 June 2008, Zhenjiang Huachen Huatong Road Machinery Company Limited, a

subsidiary of the Group, provided a guarantee to a bank for securing a loan of RMB14

million granted to a customer of the Group.

As at 30 June 2008, China First Tractor Group Finance Company Limited provided a

guarantee to a bank for securing a loan of RMB9 million granted to Yituo International

Commerce Company Limited.

Interim Report2008

44

PLEDGE OF ASSETS

As at 30 June 2008, the Group’s buildings and machinery with an aggregate book value

of approximately RMB61,133,000 (year 2007: RMB62,321,000) were pledged to secure

short term bank loans granted to the Group.

As at 30 June 2008, the Group’s prepaid land premiums with an aggregate book value

of approximately RMB7,991,000 (year 2007: RMB8,095,000) were pledged to secure

bank loans granted to the Group.

As at 30 June 2008, the Group’s deposits of approximately RMB249,570,000 (year 2007:

RMB147,168,000) were pledged to secure the Group’s bills payable of approximately

RMB324,850,000 (year 2007: RMB231,117,000).

CURRENCY EXCHANGE RISK

As the Group currently carries out its business activities mainly in the PRC, its operating

expenditure as well as capital income and expenditure are principally denominated in

Renminbi, with a small amount of income and expenditure denominated in Hong Kong

dollars. The Group’s debt in foreign currency is mainly applied to the payment of

commissions for intermediaries outside the PRC and dividends to holders of H Shares.

During the Reporting Period, fluctuations in exchange rates did not have material effects

on the Group’s operating business and operating cash. The Group’s cash balances are

usually deposited with financial institutions in the form of short-term deposits. The bank

loans are all in Renminbi and can be repaid by Renminbi.

As at 30 June 2008, there was no pledge of any deposits in foreign currency by the Group.

During the Reporting Period, the Group has no foreign exchange risks and there was no

hedge activity made in respect of foreign exchange r isk.

Interim Report2008

45

APPLICATION OF THE PROCEEDS FROM THE H SHARES ISSUE

In October 2007, the Company placed 60,900,000 H Shares and listed them on the Stock

Exchange of Hong Kong Limited (the “Stock Exchange”), raising net proceeds of

approximately RMB222,000,000 (approximately HK$229,400,000). During the Reporting

Period, all proceeds were applied in the Company’s technical renovation project of

wheeled tractors and used as supplementary working capital.

PLAN FOR SIGNIFICANT INVESTMENT OR ACQUISITION OFCAPITAL ASSETS OF THE GROUP IN THE FUTURE

In the second half of 2008, the Group intends to make an investment of RMB219,260,000,

which will be mainly used for the acquisition of land and construction required by heavy

power duty diesel machines project, technological renovation of large horsepower tractors,

construction of information projects such as electronic purchasing platform and office

automation system, high pressure forged steel crankshaft production lines of diesel

machines and other technological renovation projects.

ACQUISITION AND DISPOSAL OF SUBSIDIARIES

During the Reporting Period, the Group did not acquire or dispose shares of its subsidiaries.

SHARE CAPITAL, CONVERTIBLE SECURITIES, OPTIONS ANDWARRANTS

During the six months per iod ended 30 June 2008, the Company did not issue any

convertible securities, options, warrants or similar rights.

PURCHASE, SALE OR REDEMPTION OF LISTED SECURITIES OFTHE COMPANY

Neither the Company nor any of its subsidiaries purchased, sold or redeemed any of the

Company’s listed securities during the six months period ended 30 June 2008.

Interim Report2008

46

DIRECTORS’, SUPERVISORS’ AND CHIEF EXECUTIVES’INTERESTS AND SHORT POSITIONS IN THE SHARES,UNDERLYING SHARES AND DEBENTURES

As at 30 June 2008, none of the Directors, supervisors (the “Supervisors”) and chief

executives of the Company had any interests or short positions in the shares, underlying

shares or debentures of the Company or any of its associated corporations (as defined

in Part XV of the Securities and Futures Ordinance (Chapter 571, Laws of Hong Kong)

(the “SFO”)), which would have to be notified to the Company and the Stock Exchange

pursuant to Divisions 7 and 8 of Part XV of the SFO (including the interests held or

deemed to be held by them under such provision of the SFO), or as recorded in the

register required to be kept by the Company under section 352 of the SFO, or as otherwise

notified to the Company and the Stock Exchange pursuant to the Model Code for

Securities Transactions by Directors of Listed Companies.

CHANGE IN SHAREHOLDING AND STRUCTURE OF THE SHARECAPITAL OF THE COMPANY

As at 30 June 2008, the Company issued a total of 845,900,000 Shares. Its structure of

share capital was shown as follows:

Type of Shares Number of Shares Percentage

(%)

(1) Non-circulating state-owned legal

person Shares (the “Domestic Shares”) 443,910,000 52.48

(2) Circulating Shares listed in

the Stock Exchange (the “H Shares ”) 401,990,000 47.52

Total share capital 845,900,000 100.00

Interim Report2008

47

SHAREHOLDING OF SUBSTANTIAL SHAREHOLDERS

As at 30 June 2008, the following shareholders (other than the Director, Supervisor or

chief executive of the Company) of the Company have interests or short positions in the

shares and underlying shares of the Company as recorded in the register required to be

kept by the Company under section 336 of the SFO:

Domestic Shares

Approximate

percentage of

the total issued

share capital of

Name of shareholder Nature of interests Number of Shares the Company

(Note)

YTO Group Corporation Beneficial owner 443,910,000 Shares (L) 52.48%

Limited (“YTO Group”)

H Shares

Approximate

percentage of

the total issued

H Shares of

Name of shareholder Nature of interests Number of Shares the Company

(Note)

UBS AG Investment manager 17,046,000 (L) 5.09%

JPMorgan Chase & Co. Investment manager 20,226,000 (L) 5.03%

DnB NOR Asset Investment manager 47,748,000 (L) 11.88%

Management (Asia)

Limited

Note: The letter “L” represents the entities’ long positions in the Shares of the Company.

Interim Report2008

48

SHAREHOLDING OF SUBSTANTIAL SHAREHOLDERS(CONTINUED)

Save as disclosed above, so far as is known to the Directors, Supervisors or chief

executive of the Company, there is no other person (other than the Director, Supervisor

or chief executive of the Company) who, as at 30 June 2008, had an interest or a short

position in the shares or underlying shares of the Company as recorded in the register

required to be kept by the Company under section 336 of the SFO.

On the basis of the published information and to the best knowledge of the Directors,

the Company has maintained the prescribed public float under the Rules Governing the

Listing of Securities on the Stock Exchange (the “Listing Rules”) as at the date of this

report.

THE COMPANY’S STAFF AND REMUNERATION FOR STAFF

As at 30 June 2008, the Company had a total of 8,146 employees. The total remuneration

paid during the Reporting Period amounted to approximately RMB77,310,000. The pay

levels of the employees are commensurate with their responsibilities, performance and

contribution. The emolument policy of the employees of the Group is set up by the

personnel department on the basis of their merit, qualification and competence.

Remuneration of the Company’s executive Directors is subject to their positions,

performance and contribution and is linked with the operating results of the Group.

In the first half of 2008, the Company conducted “training as required” in a number of

ways. Employees in different levels were trained for 830 times so that the working quality

of the Company’s employees was improved.

Interim Report2008

49

DIRECTORS’ AND SUPERVISORS’ RIGHTS TO ACQUIRE SHARESOR DEBENTURES

At no time during the six months ended 30 June 2008 were any rights to acquire benefits

by means of the acquisition of Shares in or debentures of the Company granted to any

Directors, Supervisors, or their respective spouse or minor children, or were any rights

exercised by them; nor was the Company, its holding company, or any of its subsidiaries

or fellow subsidiaries a party to any arrangement to enable the Directors or Supervisors

to acquire such rights in any other body corporate.

AUDIT COMMITTEE

The Company has set up the Audit Committee in accordance with Rule 3.21 of the Listing

Rules, which comprises of three independent non-executive Directors.

The Audit Committee has reviewed the accounting principles, standards and practices

adopted by the Group and discussed internal controls and financial reporting matters of

the Group including a review of the unaudited interim financial statements of the Group

for the six months ended 30 June 2008 and the 2008 interim report of the Company.

The Audit Committee agreed with the financial accounting principles, standards and

methods adopted in the preparation of the Group’s unaudited interim accounts for the six

months ended 30 June 2008.

PLEDGE OF SHARES

On 29 September 2006, YTO Group, the controlling shareholder of the Company, pledged

its 50,000,000 Domestic Shares of the Company to Shanghai Pudong Development Bank

Company Limited (“Pudong Bank”) Zhengzhou Branch as a security to secure a loan

facility of RMB50,000,000 granted by Pudong Bank, to YTO (Luoyang) Fuel Jet Company

Limited ( “Fuel Jet Company’’), a non-wholly owned subsidiary of the Company. With

regard to this matter, the Company has received Corporate Substantial Shareholder

Notices from YTO Group and Pudong Bank and made an announcement. During the

Repor ting Period, the loans of Fuel Jet Company has been expired and settled and the

share pledges was released in February 2008.

Interim Report2008

50

SIGNIFICANT EVENTS

During the Report Period, the Company had no significant events to be disclosed.

CODE ON CORPORATE GOVERNANCE PRACTICES

The Board is of the view that during the Reporting Period covered in the interim results

report, the Company has complied with all code provisions stipulated in the Code on

Corporate Governance Practices as set out in Appendix 14 to the Listing Rules, implemented

sound governance and disclosure measures, and improved the internal control systems

of its own and its subsidiaries. During the Repor ting Period, there was no breach of the

Listing Rules or any material uncertainty relating to events or conditions that may affect

the Company’s ability to continue as a going concern.

MODEL CODE FOR SECURITIES TRANSACTIONS BYDIRECTORS

For the six months ended 30 June 2008, the Company has adopted a code of conduct

for securities transactions by its Directors and Supervisors in accordance with the

required standards stipulated in the Model Code for Securities Transactions by Directors

of Listed Issuers as set out in Appendix 10 to the Listing Rules. Having made specific

enquiry to all the Directors and Supervisors, the Company confirmed that all the Directors

and Supervisors have complied with the required standard set out in the Model Code for

Securities Transactions by Directors of Listed Issuers and the code of conduct.

MATERIAL LITIGATION

During the Reporting Period, none of the Company, its Directors, Supervisors or chief

executives was involved in any mater ial litigation or arbitration.

By order of the Board

Liu Dagong

Chairman

Luoyang, Henan Province, the PRC

22 August 2008

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